How to have your Paycheck Protection Program loan forgiven

If your business received a Paycheck Protection Program loan, congratulations! This program, part of the CARES Act, is providing loans so small businesses like yours so you can keep paying employees. One of the best features of the program is that the loans can be forgiven if certain criteria are met. The loan effectively becomes a grant – you get money to pay your employees and other expenses, and you don’t have to pay it back. 

There are requirements for forgiveness, however, and you need to know what they are if you don’t want to have to pay back your PPP loan. Here’s what you need to know. 

Related: New extension to PPP loans. What small business owners need to know.

PPP loan forgiveness application

If you received a Paycheck Protection Program loan, you’ll need to apply to have it forgiven. The PPP loan forgiveness application is available from the SBA website. The completed application should be submitted to your lender (not the SBA). The application asks about your expenses for payroll, rent or mortgage, and utilities. 

Payroll expenses 

You must use at least 60% of the loan proceeds for payroll expenses in order for the loan to be forgiven. In addition, you must not have reduced your payroll for 24 weeks from the time you received the loan funds. This 24-week time frame is referred to as the ‘covered period.’ 

The covered period is the 24 weeks beginning on the date the funds were disbursed. So, if you received the funds on April 22, the covered period is from April 22 to October 7. If your payroll is weekly or bi-weekly, you can start your covered period on the first day of the pay period following the loan disbursal. So, if you got your funds on April 22 and the first day of your next pay period is April 25, you can use the period from April 25 to October 10 as your covered period. 

You’ll need to provide the number of employees you had at the time you applied for the loan and the number of employees you have now (at the time you are applying for the loan forgiveness) on your application. Note that this time period is different from the covered period, since it includes the time between when you applied for the loan and when you received the funds. 

In addition to the number of employees, you’ll need to provide your payroll costs for the covered period. This includes employer contributions for health insurance and retirement plans and the amount you paid for employer state and local taxes on compensation. 

The average annual salary or hourly wage for each employee must be at least 75% of the annual salary or hourly wage for that employee between January 1, 2020 and March 31, 2020. 

Other costs

You must have used at least 60% of the loan proceeds for payroll costs. The remaining 40% can be used for rent or mortgage payments and utility costs. 
You will need to provide your business rent or mortgage payments and utility payments for the covered period on your application. If you have a mortgage on your business location, you’ll need to disclose the amount of interest (not principal) you paid, excluding any prepayments. 

Be sure to only include those expenses incurred during the covered period. Forgiven amounts for rent or mortgage payments cannot include any prepayments, so you can’t pay ahead of time just to use up the funds. 

Partial forgiveness for PPP loans

If you receive a PPP loan and don’t retain all of your employees or don’t use at least 60% of the loan for payroll costs, you may still be eligible for partial forgiveness of the loan. The loan forgiveness application includes a worksheet for partial forgiveness, which you can complete if you use less than 60% of the loan proceeds for payroll or if you do not maintain the appropriate number of full-time employees. 

If you already applied for loan forgiveness

When the CARES Act was originally signed, the Paycheck Protection Program had some pretty stringent requirements for forgiveness. Those have been relaxed somewhat by the Paycheck Protection Flexibility Act. The information here is based on those new guidelines. If you have already applied for forgiveness, check with your bank for the guidelines for your specific situation. 

Stay on top of it

As a PPP loan recipient, it’s up to you to make sure you qualify for the maximum amount of forgiveness and to comply with the program’s requirements, which can change. Make sure you keep an eye on the news about the program and stay in contact with your bank to ensure you’re requesting the appropriate amount of loan forgiveness and providing the documentation they need in a timely manner.